U.S. mortgage rates surge toward a two-year high! The U.S. housing market hits a 7% rate wall, and the real estate recovery trade comes under pressure.

U.S. mortgage rates have climbed sharply to their highest level in more than two years, further weighing on a U.S. housing market already constrained in recent years by high home prices and weak sales. According to data released Wednesday by the Mortgage Bankers Association, the contract rate on a 30-year fixed-rate mortgage rose sharply by 15 basis points to 7.12% in the week ended Sept. 18, the highest level since May 2024. However, the rate on adjustable-rate mortgages fixed for the first five years unexpectedly fell 13 basis points to 6.1%. The U.S. 30-year fixed mortgage rate can be approximately broken down into the 10-year Treasury yield + the spread of mortgage-backed securities (MBS) relative to Treasuries + markups for loan origination, servicing, guarantees and other costs and profits. As mortgage principal is gradually repaid, borrowers may also prepay or refinance, so the interest rate risk duration is not the same as the contractual 30-year term. The market typically uses the 10-year Treasury yield, rather than longer-term risk-free yields or short-term borrowing costs, as an important pricing benchmark; MBS spreads also change with factors such as prepayment risk. As the 30-year fixed mortgage rate rose to 7.12%, purchase loan applications and refinance applications fell 0.8% and 2.6%, respectively, highlighting how rising long-term financing costs are further squeezing housing affordability. At the same time, as relocation demand from some high-income and middle-class groups due to marriage and job changes still provides some support, economists differ in their judgments on how much room remains for further declines in the housing market. As shown in the chart above, U.S. mortgage rates have risen above 7%home borrowing costs have surged to their highest level since 2024. Source: Mortgage Bankers Association. U.S. mortgage rates surge above 7%, hitting a more than two-year high Mortgage rates have been on an upward trend since February. At that time, the outbreak of the Iran war pushed energy prices higher, reigniting inflation concerns. The Federal Reserve last week raised its benchmark interest rate for the first time since 2023 to curb price pressures. As borrowing costs climb, fewer Americans are applying for housing financing. The Mortgage Bankers Association's purchase index, which measures home purchase loan applications, fell 0.8% to a four-week low. The association's refinance index fell 2.6% to its lowest level since February 2025. Breaking through the 7% threshold could further dampen demand. "The reason 7% matters is simply because of the psychological impact when people see an interest rate number that starts with a '7,'" said Daryl Fairweather, chief economist at Redfin. Fairweather, a senior economist, expects higher rates to limit home price gains, but sales will remain sluggish. As shown in the chart above, homebuyers have faced high home prices and high mortgage rates in recent yearshome prices rose during the low-rate period and have remained elevated since, even amid Fed rate hikes and rate cuts. Source: National Association of Realtors, U.S. Census Bureau, U.S. Department of Housing and Urban Development. Existing home sales fell in August to their lowest level in more than a year. Homebuilder confidence this month matched its lowest level since late 2022, as higher rates deterred potential buyers while rising building materials and fuel costs pushed up expenses. Homebuilders have also been cutting jobsemployment in residential construction peaked in September 2024 and has generally trended downward since. "The housing market itself is clearly in a recession, but that recession may not be deep enough, or last long enough, to drag the rest of the economy back into recession," said Ben Ayers, senior economist at Nationwide. Borrowing costs may remain elevated. Mortgage rates closely track the 10-year U.S. Treasury yield, which is hovering near its highest level in nearly 20 years. Nationwide expects mortgage rates to remain around 7% at least through the end of this year. Even so, the room for further declines in the housing market may already be limited. As shown in the chart above, home sales and new residential construction are stuck at low levelshigh home prices and high mortgage rates are keeping buyers and builders cautious. Source: National Association of Realtors, U.S. Census Bureau, U.S. Department of Housing and Urban Development, National Association of Home Builders/Wells Fargo. "At this point, we're already very close to the bottom," said Hannah Jones, senior economist at Realtor.com. "Hitting the 7% number does have a psychological impact, but I don't think demand will fall off a cliff." Jones said that while no one moves just to time the market favorably, marriage, divorce and job changes will still support the housing market. The Mortgage Bankers Association has conducted this survey weekly since 1990, using feedback from mortgage banks, commercial banks and savings institutions. The data cover more than 75% of U.S. retail residential mortgage applications. Behind persistently high yields on 10-year and longer-dated U.S. Treasuries: inflation pressures plus AI financing demand The recent persistently high U.S. Treasury yields reflect the market's repricing of future policy rates, energy inflation caused by intensifying Middle East geopolitical tensions, and the risk compensation required to hold long-term bonds. The Federal Reserve raised rates by 25 basis points on Sept. 16, 2026, lifting the target range for the federal funds rate to 3.75%4.00%; the median of officials' rate projections released at the same time implied another 25-basis-point hike was possible within the year. On Sept. 18, corresponding to the mortgage survey, the 10-year and 30-year U.S. Treasury yields were 5.01% and 5.34%, respectively; although they fell back to 4.96% and 5.29% on Sept. 21, they remained at high levels. Inflation pressures from energy prices and subsequent tightening expectations are being transmitted through long-term financing markets to corporate investment and household homebuying costs. AI infrastructure expansion has increased long-term financing demand. Assets such as hyperscale AI data center campuses and power require long-term funding support. Long-term bond issuance by technology companies increases the interest rate risk investors must absorb; project operators may also lock in financing costs through "floating-rate borrowing + paying fixed-rate swaps," transmitting additional long-term interest rate risk to the market that prices longer-dated U.S. Treasury yields. For the 10-year and longer-dated U.S. Treasury yield curve, the more critical structural force comes from "fiscal deficits + AI bond issuance" competing for the global pool of duration bond funds: the outstanding balance of U.S. Treasuries has surpassed the unprecedented $40 trillion milestone, and the fiscal 2026 deficit is expected to be about $1.9 trillion$2.1 trillion; at the same time, AI-related debt has approached 15% of investment-grade bond issuance this year. Goldman Sachs said Alphabet, Amazon.com and other hyperscale cloud service providers (AI Hyperscalers) have issued about $194 billion in bonds this year and expects their direct financing supply in 2026 could reach about $250 billion. More broadly, AI Hyperscalers such as Alphabet, Amazon and Meta have issued nearly $220 billion in bonds so far this year, more than double the $108 billion for all of 2025, making itbased on available comparable data"a record high for the same period or a record issuance pace for the same period." Researchers at the Dallas Fed noted that these financing channels may affect long-term yields and term premiums. The core transmission mechanism behind this is increased long-term funding demand and duration risk supply, which, all else equal, creates additional upward pressure on the rate/yield curve mechanism for 10-year and longer maturities.